MUFTA is codified in Minnesota Statute’s §513.41 – §513.51.
As the fight is generally between the creditor and the transferee, we must understand what a transfer is, and what constitutes an asset. The definitions section is §513.41.
A transfer can take place in just about every manner. ““Transfer” means every mode, direct, or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset.” Minn. Stat. Ann. § 513.41 (West). A transfer specifically excludes a contribution of money or an asset to a qualified charitable or religious organization, unless made within two years of commencement of an action under the Act with the intent to hinder, delay, or defraud a creditor, or if the debtor was insolvent, unreasonably small remaining business assets, or beyond the ability to pay.
Nearly every piece of property is an asset that is covered by the Act, with a few express exceptions. There are three types of assets that are expressly not covered. The definition of “Asset” excludes property encumbered by a valid lien, property generally exempt under non-bankruptcy law, or property held in tenancy by the entireties if the claim is not against all those with an interest. Minn. Stat. Ann. § 513.41 (West.) All other assets are subject to MUFTA.
Transfer with Intent to hinder, delay, or defraud the creditor of the debtor
Under M.S.A. §513.44 if an asset transfer is made “with actual intent to hinder, delay, or defraud the creditor of the debtor” the transfer is fraudulent. Minn. Stat. Ann. § 513.44 (West). The simple act of the transfer itself does not show the requisite intent. The “Badges of Fraud” may establish the requisite intent constructively. These factors are enumerated in §513.44(b) and include transfer to an insider, debtor retaining possession or control, concealed transfer, transfer under threat of suit, substantially all of the debtors assets, the debtor absconded, debtor concealed assets, value received, insolvency, timing, essential assets of a business. Minn. Stat. Ann. § 513.44 (West).
Let’s break down some of the more common factors by starting with insider trading. For an individual debtor an “insider” includes in M.S.A. §513.41 a relative of the debtor; a partnership in which the debtor is a general partner; a corporation if the debtor is director, officer, or person in control if the debtor is an individual. Minn. Stat. Ann. § 513.41 (West). The definition also includes list for an insider if the debtor is a corporation or a partnership.
A debtor is considered to retain possession or control of property in a few situations. When a debtor transfers property into a revocable trust, he is considered to have retained control. “The trust was designed to be revocable by Erling and Catherine, supporting the trial court’s conclusion that Erling Leth retained control of the property transferred.” Citizens State Bank of Hayfield v. Leth, 450 N.W.2d 923, 927 (Minn. App. 1990).
A concealed transfer would be a transfer that on its face appears to be attempting to hide assets. This may typically arise when a debtor has bank accounts hidden away from his daily use. Another case may be when a company is using a subsidiary to receive payments. In Supplee, the Minnesota Court of Appeals said, “evidence was presented that many of the payments made by Supplee to Gibson were deposited into an account for Whitefish Mini-Storage (Whitefish), a storage company owned by Gibson. It is reasonable that the jury could have viewed this as an attempt to conceal the transfer.” D & K Healthcare Resources, Inc. v. Supplee Enterprises, Inc., A04-1501, 2005 WL 1270527 (Minn. App. 2005).
Value under M.S.A. §513.43 does not include “an unperformed promise made otherwise than in the ordinary course of business.” “In Minnesota, as elsewhere, the transfer of property pursuant to a regularly conducted, noncollusive mortgage foreclosure sale satisfies the requirement of reasonably equivalent value. Minn.Stat. § 513.43(b).” In re Butler, 552 N.W.2d 226, 232 (Minn. 1996).
Insolvency under M.S.A. 513.42 is determined “if the sum of the debtor’s debts is greater than all of the debtor’s assets, at a fair valuation.” The statute continues to say that a debtor who is generally not paying debts is presumed to be insolvent. “This presumption may not be rebutted by evidence that their assets exceed their debts. Appellants do not cite any authority that the presumption of insolvency is rebutted by such evidence.” Wara Real Est. Co., K.S.C.C. v. Wara Real Est. Inc, A05-1407, 2006 WL 1461028 (Minn. App. 2006). Another issue involving insolvency is the transferring of assets into a trust in which the trustee has sole discretion to make payments. In such a case, it would render a debtor insolvent under the Act. “Leth’s transfer to a trust which could make payments to Leth in the sole discretion of the trustee left him with no nonexempt assets and thus rendered him insolvent.” Citizens State Bank of Hayfield v. Leth, 450 N.W.2d 923, 927 (Minn. App. 1990).
When a judge is determining intent by using the “Badges of Fraud” factors, a single factor is almost never enough to find the requisite intent. “The presence of a single badge of fraud is not sufficient to establish actual fraudulent intent”. In re Sherman, 67 F.3d 1348, 1354 (8th Cir. 1995). Further, the finding of several factors creates a rebuttable presumption. “The presence of several or more of these “badges of fraud” gives rise to a presumption of fraudulent intent.” In re Northgate Computer Sys., Inc., 240 B.R. 328, 360 (Bankr. D. Minn. 1999.). “Furthermore, we note that under section 513.44(b), a court is not limited to only those factors or “badges” enumerated, but is free to consider any other factors bearing upon the issue of fraudulent intent.” In re Sholdan, 217 F.3d 1006, 1010 (8th Cir. 2000). The courts have consistently reasoned that where there is truly an intent to harm the creditors, multiple factors will be present. “The courts recognize that certain sorts of events, conditions, or characteristics frequently accompany the execution of a scheme to defraud third-party creditors”. In re Northgate Computer Sys., Inc., 240 B.R. 328, 360 (Bankr. D. Minn. 1999). Ultimately under M.S.A. 513.44 (1) intent to hinder, defraud, or delay the creditors of the debtor may be found by the showing of more than one “Badge of Fraud” factor, which will result in remedies for the creditor.
Transfer failing to provide Reasonably Equivalent Value
Another way to have a finding of a fraudulent transfer is if the debtor failed to “receive a reasonably equivalent value in exchange for the transfer or obligation” and it would result in either: (1) the debtor having an unreasonably small number of assets in relation or (2) “if the debtor would become unable, or believed, or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due. Minn. Stat. Ann. § 513.44 (West). This route always requires the transfer to fail for equivalent value.
The courts have determined that “Reasonably equivalent value” is a question of fact. “Whether a transfer is made for a reasonably equivalent value is a question of fact” In re Roco Corp., 701 F.2d 978, 981-82 (1st Cir.1983). This Requires “the court to consider all factors bearing on value in the marketplace.” In re Bob’s Sea Ray Boats, Inc., 144 B.R. 451, 457 (Bankr. D.N.D. 1992). The courts also state that the question is “fundamentally one of common sense”. In re Northgate Computer Sys., Inc., 240 B.R. 328, 365 (Bankr. D. Minn. 1999). The courts have created a set of factors to be considered in the factual determination of whether reasonably equivalent value was given. “Factors to be considered include the good faith of the transferee, the relation differences in the amount paid compared to the fair market value, and the percentage of the amount paid is of the fair market value.” In re Morris Commun. NC, Inc., 914 F.2d 458, 467 (4th Cir. 1990). “Another factor said to be of “considerable importance” in assessing reasonable equivalence is whether the sale was “an arm’s length transaction between a willing buyer and a willing seller.” Bundles, supra, at 824.” Id.
If there is a finding that the transfer failed for reasonably equivalent value then one of two elements must be also found. The first element is if the debtor’s remaining assets are unreasonably small in relation to the business or transaction. The second element under M.S.A. 513.44(2) would be to show that the debtor is unable or reasonably should have believed he would be unable to pay his debts as they became due.
Transfer to another creditor
Another type of fraudulent transfer is one that involves a transfer of an asset to a creditor. These transfers are governed by M.S.A. §513.45. There are two types of asset transfers to a creditor that would be fraudulent.
The first type of fraudulent transfer in this situation would be a transfer of an asset to a creditor without receiving reasonably equivalent value in exchange when the debtor was insolvent or the transfer resulted in insolvency, if at the time of transfer the debtor had another creditor.
The second type of fraudulent transfer would be a transfer of an asset to an insider for an antecedent debt. This type of transfer is fraudulent according to M.S.A. §513.45 if the debtor was insolvent at the time and the debtor had reasonable cause to know. In this context antecedent is not referring to whether the debt is current or late on payment. “Given the similarities between § 513.45(b) and § 547 of the Bankruptcy Code, the Court concludes that the meaning of “antecedent debt” in § 513.45(b) likewise means nothing more than debt that exists before the transfer.” Elliot & Callan, Inc. v. Crofton, 615 F. Supp. 2d 963, 969 (D. Minn. 2009). An Insider and “Insolvency” were addressed in section “I” above.
The only complete defense available to a transferee if intent to hinder, defraud, or delay a creditor is found, is that he received the asset in good faith and for a reasonably equivalent value. Defenses are not available to a transferee under the second option for finding a fraudulent transfer. This is because the transferee did not receive reasonably equivalent value. Defenses are listed under M.S.A. 513.48.
The remedies available in a fraudulent transfer case are extensive and the courts have wide discretion. The typical result will be a simple voidance of the transfer. Thus the asset will go back to property of the estate so that the creditors will have access to it during collection. M.S.A 513.47 also allows for attachment to the asset, principles of equity, injunctive relief, appointment of a receiver, or any other relief circumstances require. If a judgment has already been obtained by a creditor a court may also levy execution on the asset or its proceeds.
Step-By-Step Approach to a potential fraudulent transfer problem
The following is a step-by-step approach to a potential fraudulent transfer problem. Following these steps will allow you to determine a potential claim. In-depth analysis of elements are addressed above.
The first step is to determine if a fraudulent transfer occurred. Keep in mind two elements, timing and intent. Timing deals with either when the transfer occurred, before or after the claim arose. While intent to defraud requires actual proof, the courts may constructively determine intent based on “badges of fraud”. These elements are relevant to the four tests to determine if a transfer was in fact fraudulent.
Subsequent Creditor Test
The first test is the “Subsequent Creditor Test”. In this test, the transfer must occur before the claim arose. Then if the debtor transferred the asset without receiving reasonably equivalent value and the transfer left the debtor insolvent the transaction was fraudulent.
Existing Creditor Test
The Second test is the “Existing Creditor Test”. This test requires the transfer of property to an insider while insolvent to occur after the creditor’s claim arose. If so, the transfer is fraudulent.
No Consideration Test
The third test is the “No Consideration Test”. A transaction may be fraudulent if the debtor fails to receive the reasonable equivalent and either has unreasonably small assets or results in the debtor being unable to pay his debts when they become due. The timing of the transfer is not relevant in this test.
Circumstantial Evidence Tes
The fourth test is the “Circumstantial Evidence Test”. This test takes into account the “Badges of Fraud”. The badges of fraud are factors in determining the intent of the debtor. These factors include insolvency, lack of consideration, insider, threat of litigation, financial situation at time of transfer, existence of a cumulative effect, general chronology of events, secrecy of the transaction in question, and deviation from the usual course of business.
The second step, upon a determination of a fraudulent transfer, is to determine any defenses the transferee may assert. A transferee who receives property in good faith and for a reasonably equivalent value may keep the asset.
The third step is to determine the appropriate remedy. It is important to understand the court has wide discretion in determining the appropriate remedy where a fraudulent transfer has occurred. The court will typically void the transaction, attach the assets, enjoin an asset from further transfer, or appoint a receiver. However, the court may grant any other relief that the circumstances require. The typical remedy is a simple voidance of the transaction.